eSN Special Focus: eRate Under Fire–The biggest eRate losers in 2002

By Cara Branigan, Associate Editor, eSchool News

May 1st, 2003

As lawmakers step up their scrutiny of the eRate (see Page One), the Schools and Libraries Division (SLD) of the Universal Service Administrative Co.the agency that administers the programsays it is taking steps to crack down on reported cases of waste, fraud, and abuse.

On March 10, the SLD denied nearly $590 million in 2002 applications for alleged rules violations. The agency also is forming a task force to study the issue of abuse, and it attributes a decline in 2003 applications to its improved enforcement efforts.

What does all this mean for your schools? Read on to find out.

$590 million in 2002 requests denied

In its March 10 wave of funding decision letters, the SLD denied nearly $590 million worth of 2002 applications because they allegedly violated the program’s competitive-bidding requirements. About $470 million of these applications reportedly listed IBM Corp. as the primary service provider.

The SLD had announced in early December that it had identified a “pattern” of competitive-bidding violations and had warned eRate applicants not to list vendors guilty of the same practices on their 2003 applications.

At the time of its warning, the agency confirmed that IBMwhich is listed on applications requesting more than $1 billion in 2002 eRate fundingwas the chief service provider involved in this alleged pattern. The SLD had denied only one application listing IBM as a vendor at the time, but a precursory review of other applications listing IBM as a service provider indicated that a larger pattern of violations likely existed, the agency said.

On March 10, the SLD rejected an additional $470.2 million in applications involving IBM, according to figures from eRate consulting firm Funds for Learning LLC, which calculated this information using the SLD’s Data Retrieval Tool.

“IBM has $1 billion worth of [2002] applications and … half of them got shot down [on March 10],” confirmed Greg Weisiger, state eRate coordinator for the Virginia Department of Education, who also calculated this information using the Data Retrieval Tool. “IBM has $312 million worth of denials in Texas alone.”

In most cases, the agency denied funding because applicants incorrectly selected their vendors with a request for proposals (RFP) and not with a Form 470. In addition, the price of services was set after the vendor was selected, in direct violation of the program’s competitive-bidding requirements.

IBM spokesman Andy Kendzie said the company would not comment on the denials until it had a chance to review them thoroughly.

“We’re going to assess it at that point,” Kendzie said. “We really need to look at the reasons behind each of the denials.”

IBM already has appealed to the Federal Communications Commission (FCC) to overturn the SLD’s rejection of the Ysleta Independent School District in Texas, the first IBM customer to be denied funding on the basis of alleged competitive-bidding violations. IBM has asked the FCC for an expedited ruling in this case.

More denial notices have followed in subsequent waves of funding decision letters. (For a list of the largest denials by dollar amount, see the charts on page 31.)

March 10 also was the SLD’s goal for completing its review of all remaining applications for the 2002 program year, which began last July 1 and ends this June 30but the close scrutiny required of a number of applications for possible program violations has prolonged the review process even further. With its March 10 wave of decision letters, the SLD had awarded only $1.83 billion of the $2.25 billion in available 2002 funding.

The agency has made “a significant amount of progress, but a significant amount of people aren’t happy that more applications [have not yet been] approved,” said Funds for Learning’s vice president of communications, Sara Fitzgerald.

Some applicants are in a bind because the 2002 and 2003 program years are now overlapping. The deadline for 2003 applications was Feb. 6but many applicants had not received notification of their 2002 funding by that date, which made it difficult to plan for the 2003 program year.

Applicants who receive notification of their 2002 funding after March 1 have

until Sept. 30, 2004 to use their funds for non-recurring expenses, such as internal wiring projects.

“The thing that has caused some schools pain is that the rule does not apply to recurring expenses,” said Fitzgerald, who noted that schools have been forced to pay in full for recurring expensessuch as monthly telephone and internet service billssince last July 1 without knowing whether they’d be funded.

eRate demand drops $1 billion in 2003

On April 3, the SLD announced that requests for 2003 eRate discounts will total roughly $1 billion less than last year, according to an initial tally of 2003 applications. The agency attributes this

decline to its increased vigilance and warnings concerning waste, fraud, and abuse.

Throughout the filing window for 2003, SLD warned applicants to make sure they adhered to the program’s rules, citing the pattern it had identified among 2002 applications that violated the eRate’s competitive-bidding requirements. Many of these 2002 applications came from small schools and districts requesting internal connections at the 90-percent discount level.

Perhaps not coincidentally, the largest drop in 2003 applications occurred in requests for internal connections at the 90-percent discount level. Requests for these Priority Two services declined by $500 million (19 percent) compared with last year’s requests.

Demand for telecommunications services shrank by $100 million (7 percent). The rest of the declineabout $445 millionoccurred in applications requesting internal connections at discount levels of 89 percent or below.

In contrast to the overall trend, demand for internet access increased by $27 million (6 percent).

“Maybe people are looking at what you can apply for and heeding some of our warnings, Blackwell said.

He added, “This is going into our sixth year, so applicants are getting smarter. They know better what will and won’t get denied.”

Perhaps owing to the fact that IBM was identified as the chief company involved in the alleged pattern of competitive-bidding violations, fewer 2003 eRate applicants listed IBM as a service provider than in previous years.

According to Funds for Learning’s calculations, which reflect publicly available SLD data as of April 7, IBM was listed as a service provider on only 67 applications this year, compared with 168 applications in 2002 and 197 applications in 2001.

IBM did not respond to requests for comment before press time.

In total, applicants requested an estimated $4.718 billion in 2003 eRate funding, down 18 percent from the $5.736 billion requested in 2002. This estimate is based on the dollars requested in the 41,146 applications received or postmarked by Feb. 6, the close of the 2003 filing window.

Despite the billion-dollar decrease, demand for eRate discounts is still high. For the third year in a row, applicants have requested more than double the $2.25 billion available. “It’s still more than we have [to give],” Blackwell said.

Applicants requested an estimated $1.745 billion for telecommunications services and internet access this year. Demand for internal connections at the 90-percent level is an estimated $2.116 billion. The SLD expects these figures to decrease slightly once it has weeded out duplicate, incomplete, and ineligible applications.

Although the dollar amount requested for 2003 is less than last year, the SLD received 14 percent more applications. “There were more applications sent in than last year because we asked people to break up their applications,” Blackwell said.

The SLD asked applicants to submit their funding requests for internal connections (Priority Two services) and telecommunications services and internet access (Priority One services) separately. The agency has not yet calculated how many unique entities applied.

The number of applicants who filed online rose slightly. For funding year 2003, 92.2 percent of applicants filed online, compared with 85.7 percent in 2002.

Budget deficits, in addition to the SLD’s attempts to “weed out the bad guys,” might have contributed to the decline in 2003 requests, according to Fitzgerald.

“I was not necessarily surprised that [eRate demand] had decreased for 2003,” she said. “To be able to use eRate discounts you have to use some of your own money, and it may reflect that schools’ budgets are pretty tight.”

Also, in working with applicants, Fitzgerald said, she often hears them say they are not poor enough to qualifyso why bother. “It seems people have sort of given up, given the way the program has gone in the last few years, [just assuming] that they won’t be funded,” she said.

But that attitude sometimes can be costly. In late March, the SLD began fulfilling program year 2002 requests for internal connections down to the 81-percent discount level.

“Now that they’ve taken it down to the 81-percent level, so many school [officials] are saying, ‘Oh my God, why didn’t I apply?'” said Gary Rawson, infrastructure planning and eRate coordinator for Mississippi’s Information Technology Services department. Rawson is also chairman of the State eRate Coordinator Group, which is sponsored by the Council of Chief State School Officers.

Task force to study abuse

In a further attempt to address criticism of the program, the SLD has created an eRate Task Force to identify areas where improvements can be made to combat potential waste, fraud, and abuse by both service providers and applicants.

“The eRate Task Force is one of the highlights going forward,” Blackwell said. “It won’t have an impact on 2003 because we’ll be working through the summer, and then we’ll have to report to the FCC before any policies can be made.”

The task force consists of 14 members representing schools, libraries, state telecommunication networks, and service providers from all three caterogies of services eligible under the eRate.

Members of the task force will meet to review every aspect of the eRate program where waste, fraud, and abuse can occurincluding the application process, applicant review and funding commitment procedures, and invoicing. They also will review publicly available documents to determine what changes could be made to help prevent waste, fraud, and abuse.

The task force will meet three times and will produce a final report of its recommendations this summer.

“I think it’s a good, positive step,” Fitzgerald said. “Hopefully some good recommendations will come out of it.”

The SLD will provide an eMail address for each member of the task force on its web site in the near future, so anyone who wishes to contact members and offer their input can do so.

The agency created a similar task force a few years ago to find ways to streamline the application process, Blackwell noted.

Besides starting a new task force, the SLD said it would continue educating applicants, issuing warnings, and simplifying the application process.

“It’s always a goal that we [make the program] easier,” Blackwell said.

THE BIGGEST eRATE LOSERS IN 2002

Here’s a list of vendors and applicants that had the largest volume of 2002 eRate funding requests rejected as of March 24, according to data compiled by eRate consulting firm Funds for Learning. Vendor rejections are broken down by service category. The vendor totals for internal connections exclude rejections for applicants with discount rates below 80 percent, because the SLD determined it did not have enough money to fund those requestsso they were not reviewed for program compliance. (At press time, the SLD was still reviewing requests from applicants at the 80-percent discount rate to determine whether they could be funded.)

Many of these rejections involved cases in which the SLD concluded that applicants did not follow the eRate’s competitive-bidding rules. In some cases, a vendor’s funding requests might have been rejected even though the vendor was not directly involved with the competitive-bidding violations. If the SLD determines that a Form 470the application that is used to solicit bidshas been “tainted” by vendor involvement, this can lead to the rejection of any funding request that references that particular Form 470, including those involving other vendors.

Internal Connections Rejections at Discount Rates of 80% or Above

1

IBM Corp.

$ 612,910,307

2

Gallaher & Associates Inc.

$ 69,317,575

3

SBC DataComm

$ 33,066,952

4

Spectrum Communications

$ 23,675,654

5

BellSouth Communications Systems Inc.

$ 18,368,496

6

Multimedia Communications Services Corp.

$ 15,543,600

7

Alexander Open Systems Inc.

$ 13,737,045

8

Region IV Education Service Center

$ 11,567,669

9

Atlanta Datacom Inc.

$ 11,180,828

10

Cabletron Systems Sales & Services Inc.

$ 10,338,721

Applicants with Greatest Volume of Rejections (through March 24, 2003)